Another state aid case

On 20 June, the European Commission announced it had found Luxembourg had granted unlawful state aid to French energy giant Engie, worth about €120 million.  As is usual in these cases, Luxembourg must recover this amount from the company even if Luxembourg and the company appeals the decision to the European General Court.   

The problem, in the Commission’s view, is that Luxembourg allowed Engie to use a domestic hybrid instrument to reduce its Lux tax bill.  Essentially the same instrument gave one group member a tax deduction for financing costs, whilst the equivalent income received by another group member was tax-exempt.  The result, said the Commission, was that “LNG Supply only paid taxes on about 1% of its profits”. 

Which side is the tax liablity?

It may sound remarkable that Luxembourg gave rulings from 2008 to permit this treatment.  In the UK, HMRC has challenged vigorously similar structures put in place by companies, winning almost all cases.  The dispassionate observer may think that this does indeed sounds like a case of unlawful state aid.

However, the company may feel rather hard done by, as Luxembourg commonly allowed multinationals to use financing structures leaving profits of 1% taxed in the Grand Duchy.   The logic behind this approach is that most of the risks are borne outside the country, with the result that a 1% profit offers a fair return.  No doubt this will form part of the argument put forward at the General Court.